Succession planning should begin from the earliest days of business

Succession planning should happen as soon as a company gets off the ground

Almost from the point of creating the business, you should have an exit strategy

Andrew Pigott grew up in a business family. Pigott Construction was founded by his great grandfather Michael in the 1870s. The business grew with the country, building rail lines, hospitals and landmarks such as the Royal Ontario Museum and the Burlington Skyway bridges. It survived two world wars and the Great Depression.

In the late 1980s, the construction business was booming and sales at Pigott were at record levels but growth outpaced capacity. As members of the third generation retired or died, the fourth generation was not prepared to take over. There was no clear vision of succession, strategy or governance in place. In the end, Mr. Pigott, who was heading up the heavy equipment division, was tasked with handing out termination notices to the people who had trained and mentored him. The construction business was sold and the equipment business liquidated.

“We had not done a good job of planning or grooming the next generation to take the reins at the right time,” says Mr. Pigott, who now heads up The Succession Bridge in Oakville, Ontario and is an ownership and succession strategist, advising family businesses on transition and exit strategies. “Family adds a whole other dynamic to the succession process. Not only do you have to be strategic and manage operations, you have to be strategic and mange the family as well.

If the family is not on side with respect to strategy and direction, then you are setting yourself up for challenges

“If the family is not on side with respect to strategy and direction, then you are setting yourself up for challenges. There was no clear succession plan for management or ownership and that’s where we got caught short. The decision to sell was made for us because we had no other options.”

When it comes to succession, particularly in family businesses, the key is to think long term, plan and communicate with the next generation, says Mr. Pigott.

“In family businesses, because the founder is entrepreneurial and used to making things work, they often don’t talk about expectations and rules around how the business will function in the future. My grandfather had five sons who came into the business as equal shareholders but with no clear conversations about how they were going to function and deal with each other and the business going forward. Without those clear rules of engagement, you live in an environment where people make assumptions and don’t know how to behave. ”

Too often, people don’t start contemplating succession until they are approaching retirement

“Too often, people don’t start contemplating succession until they are approaching retirement. Almost from the point of creating the business, you should have an exit strategy. You need to think about what that might look like. Maybe it will go public, or you will sell it to the employees or sell it outright. Or you may want to pass it on to the children and if they are capable, they can run it. Or maybe they will stay on as owners while professional managers run it. Succession can take different forms. The key is to give yourself those options.”

To do that requires a well thought out plan that is communicated and understood by the family and the management team. “When things go unspoken, people make assumptions that could lead to conflict,” says Mr. Pigott. “You create viability by having the structures that allows you to have difficult conversations.” He points to the creation of family and owners’ forums where everyone has a voice in how the business is being stewarded and how it will transition and a family charter that spells out what is expected.

If people feel they are treated unfairly that will impact family dynamics

“Long term, you need to make sure the family and business are thinking in parallel.” The fact is conflict is an ingredient in any relationship. Be prepared for what the obstacles might be and what you can do to avoid them. In some cases, it may be necessary to bring in a mediator or family business counsellor.”

One typical source of family conflict at the time of transition is a tendency for parents to try and be equal with their children. University of Alberta’s research shows that at the point of succession, many parents want to include all children equally but typically it’s one who takes over and buys the others out.

“If people feel they are treated unfairly that will impact family dynamics,” says Mr. Steier. “I worked with a successful entrepreneur in western Canada who sold the business for $60-million. Each of three children received $15 million. He thought it was an equal four-way split. But you couldn’t get the family in the room without a major fight. That’s not surprising. There should be an appreciation of the asset, what it took to build it and that needs to be communicated, as well as plans for how it may be divided recognizing that fair doesn’t always mean equal.”

It is also important to recognize that that stewardship of the business is distinct from loyalty to family. Whoever moves into the CEO job needs to have the skills and proper training to take the business to the next level.

“Some of the more successful family firms require children to have a university degree and work outside the business for five years during which time they should have been promoted to a management position,” says Mr. Steier. “This gives both the individual and employees and other family members a level of confidence. There should be a gradual increasing of responsibility with parents shifting from operations to more of a mentoring role to the next generation. Succession is a process not an event.”